Chapter 05: Currency Derivatives
1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for
these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the
following is not an appropriate hedging technique under these circumstances?
a.
Purchase Canadian dollars forward.
b.
Purchase Canadian dollar futures contracts.
c.
Purchase Canadian dollar put options.
d.
Purchase Canadian dollar call options.
2. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three
months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon
negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on
September 1 is $1.15. Graylon will receive $____ for the euros.
a.
224,000
b.
220,000
c.
200,000
d.
230,000
3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at
$1.63. The forward ____ is ____ percent.
a.
b.
c.
d.
4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized
forward premium or discount of the euro?
a.
1.9 percent discount
b.
1.9 percent premium
c.
7.6 percent premium
d.
7.6 percent discount
a.
b.
c.
SOLUTION: [(F/S) 1] 360/90 = 7.6 percent.
d.
5. Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations.
Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction.
Thus, Thornton would:
a.
convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today’s
forward rate.
b.
convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the
prevailing spot rate.
c.
convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today’s
forward rate.
d.
convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the
prevailing spot rate.
6. In the United States, the typical currency futures contract is based on a currency value in terms of:
a.
euros.
b.
U.S. dollars.
c.
British pounds.
d.
Canadian dollars.
Chapter 05: Currency Derivatives
7. Currency futures contracts sold on an exchange contain:
a.
a commitment to the owner, and are standardized.
b.
a commitment to the owner, and can be tailored to the owner’s desire.
c.
a right but not a commitment to the owner, and can be tailored to the owner’s desire.
d.
a right but not a commitment to the owner, and are standardized.
8. Currency options sold through an options exchange contain:
a.
a commitment to the owner, and are standardized.
b.
a commitment to the owner, and can be tailored to the owner’s desire.
c.
a right but not a commitment to the owner, and can be tailored to the owner’s desire.
d.
a right but not a commitment to the owner, and are standardized
9. Currency options are commonly traded through the ____ system.
a.
robot
b.
Euro
c.
Globex
d.
Scope
10. Forward contracts contain:
a.
a commitment to the owner, and are standardized.
b.
a commitment to the owner, and can be tailored to the owner’s desire.
c.
a right but not a commitment to the owner, and can be tailored to the owner’s desire.
d.
a right but not a commitment to the owner, and are standardized.
11. Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and
desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
a.
Purchase a call option on francs.
b.
Sell a futures contract on francs.
c.
Obtain a forward contract to purchase francs forward.
d.
All of the above are appropriate strategies for the scenario described.
12. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future
and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
a.
Purchase a call option on francs.
b.
Obtain a forward contract to purchase francs forward.
c.
Sell a futures contract on francs.
d.
All of the above are appropriate strategies for the scenario described.
13. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros
Chapter 05: Currency Derivatives
forward in the forward exchange market.
a.
selling; selling
b.
selling; purchasing
c.
purchasing; purchasing
d.
purchasing; selling
14. When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your
part.
a.
call options; put options
b.
futures contracts; call options
c.
forward contracts; futures contracts
d.
call options; forward contracts
15. The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____
will be the premium of a put option on this currency, other things being equal.
a.
greater; lower
b.
greater; greater
c.
lower; greater
d.
lower; lower
16. When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____ bid/ask
spread.
a.
less; narrower
b.
more; narrower
Chapter 05: Currency Derivatives
c.
more; wider
d.
less; wider
17. The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____
will be the premium of a put option, other things being equal.
a.
greater; greater
b.
greater; lower
c.
lower; lower
d.
lower; greater
18. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A
pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and
continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the
information above is:
a.
$1,562.50.
b.
−$1,562.50.
c.
−$1,250.00.
d.
−$625.00.
19. Which of the following is true?
a.
The futures market is used for both hedging and speculating while the forward market is primarily used for
hedging.
Chapter 05: Currency Derivatives
b.
The futures market is used for both hedging and speculating while the forward market is primarily used for
speculating.
c.
Both the futures market and the forward market are primarily used for speculating.
d.
The futures market is primarily used for hedgingwhile the forward market is used for speculating.
20. Which of the following is true?
a.
Most forward contracts between firms and banks are for speculative purposes.
b.
A security deposit is not required for futures contracts.
c.
The forward contracts offered by banks have maturities for only four possible dates in the future.
d.
none of the above
21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.
a.
buy a euro call and buy a euro put
b.
buy a euro call and sell a euro put
c.
sell a euro call and sell a euro put
d.
sell a euro call and buy a euro put
22. If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put
options.
a.
purchasing; selling
b.
purchasing; purchasing
c.
selling; selling
d.
selling; purchasing
Chapter 05: Currency Derivatives
23. Which of the following is correct?
a.
The longer the time to maturity, the lower the value of a currency call option, other things being equal.
b.
The longer the time to maturity, the lower the value of a currency put option, other things being equal.
c.
The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other
things being equal.
d.
The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other
things being equal.
24. Research has found that the options market is:
a.
efficient before controlling for transaction costs.
b.
efficient after controlling for transaction costs.
c.
highly inefficient.
d.
none of the above
25. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a
settlement date 180 days from now will:
a.
definitely be above the 180-day forward rate.
b.
definitely be below the 180-day forward rate.
c.
be about the same as the 180-day forward rate.
d.
none of the above; there is no relation between the futures and forward prices.
26. Assume that a currency’s spot and future prices are the same, and the currency’s interest rate is higher than the U.S.
rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency’s spot rate and ____ the
currency’s futures price.
a.
put upward pressure on; put upward pressure on
b.
put downward pressure on; put upward pressure on
c.
put upward pressure on; put downward pressure on
d.
put downward pressure on; put downward pressure on
27. A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain
such a position. It can close out its position by:
a.
buying an identical futures contract.
b.
selling an identical futures contract.
c.
buying a futures contract with a different settlement date.
d.
selling a futures contract for a different amount of currency.
e.
purchasing a put option contract in the same currency.
28. If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely
____ over that same period.
a.
increase slightly
b.
decrease substantially
c.
increase substantially
d.
stay the same
29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted
until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government
in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:
a.
selling futures in francs.
b.
buying futures in francs.
c.
buying franc put options.
d.
buying franc call options.
30. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The
exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the
premium paid)?
a.
$6,875,000.
b.
$7,250,000.
c.
$7,000,000.
d.
$6,500,000.
e.
none of the above
premium = $6,500,000.
a.
b.
c.
e.
31. If you purchase a straddle on euros, this implies that you:
a.
finance the purchase of a call option by selling a put option in the euros.
b.
finance the purchase of a call option by selling a call option in the euros.
c.
finance the purchase of a put option by selling a put option in the euros.
d.
finance the purchase of a put option by selling a call option in the euros.
e.
none of the above
32. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the
buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put
option are speculators.)
a.
$1.63; $1.63
b.
$1.63; $1.60
c.
$1.63; $1.57
d.
$1.57; $1.63
e.
none of the above
a.
b.
c.
e.
33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The
exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is
$.87, the profit as a percent of the initial investment (the premium paid) is:
a.
0 percent.
b.
25 percent.
c.
50 percent.
d.
150 percent.
e.
none of the above
Chapter 05: Currency Derivatives
a.
b.
d.
e.
34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will
not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:
a.
−$.03.
b.
−$.02.
c.
−$.01.
d.
$.02.
e.
none of the above
a.
b.
SOLUTION: Net profit per unit = $1.65 $1.64 $.03 = $.02.
c.
d.
e.
35. You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not
be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:
a.
−$.03.
b.
−$.02.
c.
−$.01.
d.
$.02.
e.
none of the above
Chapter 05: Currency Derivatives
36. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price
of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on
the expiration date, your net profit per unit is:
a.
−$.08.
b.
−$.03.
c.
$.05.
d.
$.08.
e.
none of the above
37. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price
of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on
the expiration date, your net profit per unit is:
a.
−$.08.
b.
−$.03.
c.
$.05.
d.
$.08.
e.
none of the above
38. European currency options can be exercised ____; American currency options can be exercised ____.
Chapter 05: Currency Derivatives
a.
any time up to the expiration date; any time up to the expiration date
b.
any time up to the expiration date; only on the expiration date
c.
only on the expiration date; only on the expiration date
d.
only on the expiration date; any time up to the expiration date
39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken,
it could ____ to hedge the exchange rate risk on those exports.
a.
sell yen put options
b.
buy yen call options
c.
buy futures contracts on yen
d.
sell futures contracts on yen
40. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call
option can be referred to as:
a.
in the money.
b.
out of the money.
c.
at the money.
d.
at a discount
41. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put
option can be referred to as:
a.
in the money.
b.
out of the money.
c.
at the money.
Chapter 05: Currency Derivatives
d.
at a discount.
42. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?
a.
forward contracts
b.
futures contracts
c.
non-deliverable forward contracts
d.
options
e.
all of the above are instruments used to cover foreign currency positions.
43. When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may
attempt to simultaneously ____ euros forward and ____ euro futures.
a.
sell; sell
b.
buy; sell
c.
sell; buy
d.
buy; buy
44. When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest
rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the
foreign country, and ____ futures in the foreign currency.
a.
buy; buy
b.
sell; buy
c.
buy; sell
d.
buy; buy
45. Which of the following would result in a profit on a euro futures contract when the euro depreciates?
a.
Buy a euro futures contract; sell a futures contract after the euro has depreciated.
b.
Sell a euro futures contract; buy a futures contract after the euro has depreciated.
c.
Buy a euro futures contract; buy an additional futures contract after the euro has depreciated
d.
None of the above would result in a profit when the euro depreciates.
46. Which of the following is not true regarding options?
a.
Options are traded on exchanges, never over-the-counter.
b.
Similar to futures contracts, margin requirements are normally imposed on option traders.
c.
Although commissions for options are fixed per transaction, multiple contracts may be involved in a
transaction, thus lowering the commission per contract.
d.
Currency options can be classified as either put or call options.
e.
All of the above are true.
47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The
premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net
amount received by the corporation if it acts rationally?
a.
$74,000.
b.
$84,000.
c.
$75,000
d.
$85,000.
48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and
the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the
corporation if it acts rationally?
a.
$33,600.
b.
$46,900.
c.
$44,100.
d.
$36,400.
49. Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of $.19 to $.21.
Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to
buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?
a.
no; −$0.01.
b.
yes; $0.01.
c.
yes; −$0.01.
d.
yes; $0.03.
50. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45,
he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option’s maturity
turns out to be $1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts rationally)?
a.
−$0.01.
received less premium = $84,000.
Chapter 05: Currency Derivatives
b.
$0.01.
c.
−$0.04.
d.
$0.04.
e.
−$0.03.
51. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has
negotiated a non-deliverable forward contract with its bank. The reference rate is the baht’s closing exchange rate (in $)
quoted by Thailand’s central bank in 90 days. The baht’s spot rate today is $.02. If the rate quoted by Thailand’s central
bank on August 1 is $.022, Johnson will ____ $____.
a.
pay; 20,000
b.
be paid; 20,000
c.
pay; 2,000
d.
be paid; 2,000
e.
none of the above
52. If the observed put option premium is less than what is suggested by the put-call parity equation, astute speculators
could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.
a.
selling; buying; buying
b.
buying; selling; buying
c.
selling; buying; selling
d.
buying; buying; buying
53. A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying
____ prices. The upper bound of a put option premium is the ____ price.
a.
spot and exercise; exercise
b.
spot and exercise; spot
c.
exercise and spot; exercise
d.
exercise and spot; spot
54. A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying
____ prices. The upper bound of a call option premium is the ____ price.
a.
spot and exercise; exercise
b.
spot and exercise; spot
c.
exercise and spot; exercise
d.
exercise and spot; spot
55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____
of ____.
a.
premium; about 6 percent
b.
discount; about 6 percent
c.
discount; about 6.45 percent
d.
premium; about 6.45 percent
56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency
exhibits a ____ of ____ on an annualized basis.
Chapter 05: Currency Derivatives
a.
discount; 11.11 percent
b.
premium; 11.11 percent
c.
premium; 10.81 percent
d.
discount; 10.81 percent
57. Which of the following are most commonly traded on an exchange?
a.
forward contracts
b.
futures contracts
c.
currencies
d.
none of the above
58. Conditional currency options are:
a.
options that do not require premiums.
b.
options where the premiums are canceled if a trigger level is reached.
c.
options that allow the buyer to decide what currency the option will be settled in.
d.
none of the above
59. Which of the following is true regarding the currency options market?
a.
Hedgers and speculators both use currency options to attempt to lower risk.